FSCS protection to be cut by European directive

The Financial Services Compensation Scheme (FSCS) was raised to £85,000 per account in 2010 following the financial crisis and specifically the collapse of Northern Rock. However, EU regulations mean that this amount is going to change, and it’s going to go down by £10,000.

The Bank of England has announced today that the Prudential Regulation Authority (PRA) is making changes to the protection under FSCS. For most savers currently covered by the FSCS, the existing level of deposit protection (£85,000) will be maintained for six months before changing to £75,000 from Jan 1 2016

The problem is that the FSCS compensation scheme is run under a European directive, which sets the limit at €100,000 across the whole of the European Union. In the UK (as we don’t use the Euro), the equivalent sterling amount is calculated every five years, and that amount is what we use until the next renewal date. Given all the gnashing of teeth over a potential Grexit, so the rates used today work out at £75,000 (rounded to the nearest £5,000), rather than the previous £85,000. Note that it realy is a case of swings and roundabouts- contrary to political spin, the Government only raised the protection level in 2010 (up from £50,000) as it was required to do so by this same EU directive, and was not, in fact, a gesture to help out poor disgruntled savers. In five years’ time it could go up or down again.

While the process and timing of this whole process is specified by the Directive and is not at the PRA’s discretion, the Bank of England announcement also specified a six month grace period- rather than becoming effective immediately (as it strictly should) the £85,000 limit will remain in place until 31 December, allowing people time to move their money should they need to do so in order to remain protected under the scheme. Note that the limit is per person and per institution, so joint accounts will get £150,000 protection from January. Any excess balance can simply be transferred to another account at a different bank to benefit from additional protection, after checking the new bank is not part of the same group- and FSCS limit- as an existing account.

"People have six months to get ready for the change, if necessary," said Mark Neale, the chief executive of the FSCS, adding that the new limit of £75,000 will still protect more than 95% of consumers. The PRA are also consulting on whether any transitional measures are necessary to cover situations where savers have money in excess of the limit tied up in accounts/binds that would cause a penalty for early withdrawal.

But there are other small changes to the scheme too, the most interesting of which covers ‘temporary high balances’ arising as a result of specified ‘life events’. From today, qualifying depositors with temporary high balances will be covered up to £1 million for six months from the date on which the money is transferred into their account, or the date on which the depositor becomes entitled to the amount, whichever is later. This is to cover situations where deposit funds go unusually over the limit as a result of specified events, including following a house sale or funds received from a ‘life event’ such as a divorce settlement or inheritance. The six month period gives these savers time to spread the cash out into a number of accounts to appropriately protect these funds.